Krugman, Deficits, Deflation, and Unemployment

July 18, 2010

Paul Krugman, with his perch on the NYT, is probably the most prominent voice of the US liberal left. His views seem to define the furthest reach of responsible leftism and that goes a long way in explaining why this crisis is turning into a bonanza for the right.

Look at yesterday’s summary of his thoughts on the monetary and fiscal role of government (here).

“…the case for stimulus has always been highly conditional. Fiscal stimulus is what you do only if two conditions are satisfied: high unemployment, so that the proximate risk is deflation, not inflation; and monetary policy constrained by the zero lower bound.”

Krugman sees the case for fiscal stimulus as limited to the simultaneous existence of two conditions but we must recognize that his first condition has been met throughout virtually the entire history of industrial capitalism. Other than during bubble expansions, unemployment / under – employment has always been high (and much higher than the official statistics).

It seems clear that Krugman’s main concern is deflation rather than unemployment. Unemployment, the primary fear of the vast majority of people, is actually not too important in Krugman’s orthodox view. This can be seen by his ready acceptance of the obscene concept of NAIRU – the Non Accelerating Inflation Rate of Unemployment. The view is that capitalism needs a certain percentage of unemployed workers in order to keep wage demands down. Is this not identical to Marx’s reserve army of labor? Here is Krugman in a highlight section of his Macroeconomics textbook:

“Policies that keep the unemployment rate below the NAIRU will lead to accelerating inflation as inflationary expectations adjust to higher levels of actual inflation. The NAIRU is equal to the natural rate of unemployment.” …. “an unemployment rate below the NAIRU cannot be maintained in the long run. As a result, there are limits to expansionary policies.” (page 462)

The issue isn’t whether NAIRU and Marx are correct in their assessment of the logic of capitalism as it currently exists. The point is that a key spokesman on the left would accept the misery of unemployment as ‘natural’ rather than proposing a different logic. The silence is deafening!

The causes of inflation are complex and now is not the time to get into them. But how about oligopoly pricing power? Virtually every industry today is controlled by a handful of companies that clearly have pricing power. It is widely agreed that monopolies (utilities, etc.) need to be regulated – why not here? Why not propose a NAIRO (with the O standing for oligopoly)? Also, income could be distributed outside of the wage through direct government subsidies. These would have no wage – price effect. Instead, Krugman uses his perch to propose nothing more than a couple more years of budget deficits now, followed by austerity (See the 1st paragraph of my post here).

The sad truth is that Krugman is just another orthodox economist.

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Good blog. Keep it up. Krugman, well, I still have real hopes for him. Whether he argues for or against Galbraith and MMT at the Times is secondary. The important thing is that he brought up in such a public place at all. People can’t fight against irrational ideas, and will & must use them, faute de mieux, if they never even hear the reasoned truth.

Thanks Calgacus. Agree it’s very encouraging that the idea is getting some play. I also have hopes for PK, especially since he has such a prominent voice. He needs to be pushed from the left, though, and not just the right.

Thanks for the link. Unfortunately I only had time to scan the book but I do have two comments on the section “Toward a New Economy”. I address two of the authors quotes:

1) “People who would readily agree that they would buy more of a firm’s product if its price were lowered relatively to their money wage are curiously unwilling to acknowledge that the firm would hire more labour if the money wage asked for it were lowered relatively to the price of its product. The sauce for the employer’s goose is apt to be declined by the employee’s gander.”

I think this quote well summarizes one of the basic problems in capitalism. It can’t be readily solved within the box. But one way out, it seems to me, would be for the government to rain purchasing power onto the economy outside of the wage – price relationship (always monitoring inflation / capacity issues). I think my post on Deficits Don’t Matter is relevant here.

2) “But it is primarily employees who are susceptible to the notion of a ‘fair’ or a ‘living’ wage, which puts the value of an hour’s labour on a higher moral plane than that of other transactions, implicitly removed from the purview of the market.”

The author seems to believe that labor should not be on a higher moral plane than other transactions but should be subject to the market. I have a fundamental disagreement with this. I believe it’s a moral failure of our culture / civilization that we consider human beings to be commodities.